The Role of Product Design in Consumers' Choices in the Individual Insurance Market

OBJECTIVE: To evaluate the role of health plan benefit design and price on consumers' decisions to purchase health insurance in the nongroup market and their choice of plan. DATA SOURCES AND STUDY SETTING: Administrative data from the three largest nongroup insurers in California and survey data about those insured in the nongroup market and the uninsured in California. STUDY DESIGN: The authors fit a nested logit model to examine the effects of plan characteristics on consumer choice while accounting for substitutability among certain groups of products. PRINCIPAL FINDINGS: Product choice is quite sensitive to price. A 10 percent decrease in the price of a product would increase its market share by about 20 percent. However, a 10 percent decrease in prices of all products would only increase overall market participation by about 4 percent. Changes in the generosity of coverage will also affect product choice, but have only small effects on overall participation. A 20 percent decrease in the deductible or maximum out-of-pocket payment of all plans would increase participation by about 0.3-0.5 percent. Perceived information search costs and other nonprice barriers have substantial effects on purchase of nongroup coverage. CONCLUSIONS: Modest subsidies will have small effects on purchase in the nongroup market. New product designs with higher deductibles are likely to be more attractive to healthy purchasers, but the new benefit designs are likely to have only small effects on market participation. In contrast, consumer education efforts have a role to play in helping to expand coverage.